Forecasting base metal prices with exchange rate expectations

Abstract

In this paper, we show that survey‐based expectations of the Chilean exchange rate have the ability to predict the returns of the six primary non‐ferrous metals: aluminum, copper, lead, nickel, tin, and zinc. Predictability is also found for returns of the London Metal Exchange Index. Previous studies have shown that the Chilean exchange rate has the ability to predict copper returns, a world commodity index and base metal prices. Nevertheless, our results indicate that expectations about the Chilean peso have stronger predictive ability relative to the first lag of the Chilean currency. This is shown both in‐sample and out‐of‐sample. By focusing on expectations of a commodity currency, and not on the currency itself, our paper provides indirect but new and strong evidence of the ability that commodity currencies have to forecast commodity prices.